You just became a parent. Every moment is brand new. Your time is consumed with caring for your child, trying to savor each new milestone. Some days you are simply trying to survive.
As a new parent, college is probably not on your radar. However, with rising college costs, planning and saving earlier can help you be prepared when it’s time for your child to go to college.
2018 saw a rise in tuition costs for most colleges, a trend that is likely to continue. The average four-year, in-state school tuition, room and board, and fees were $21,370. Private colleges cost even more, with the average college expenses for 2018-2019 reaching $48,510. You can imagine how much more it will cost when your baby steps onto a college campus for the first time.
Is there anything new parents can do to save for their child’s college education? The answer is yes. Parents have several options to choose from to alleviate future college costs for their child.
1. Open a 529 College Savings Plan
529 college savings plans give parents a way to invest money into diversified, low-cost stock and bond funds, and then withdraw money (tax-free) for qualified education expenses.
One nice feature to 529 accounts is that if you have more than one child, you can transfer 529s between beneficiaries without any tax penalties. So if your child earns scholarships, your 529 won’t go to waste.
Another situation you can use this is if your child is going to graduate school. You might be better off letting them borrow through student loans, because of forgiveness programs that use income-driven repayment plans like PAYE and REPAYE.
2. Look into Coverdell Educational Savings Accounts
Similar to a 529 plan, Coverdell Educational Savings Accounts (ESAs) allow tax-free investments and tax-free withdrawals for education expenses. You can also use ESAs for K-12 expenses. ESAs are only available to families below a specified income level and they have lower maximum contribution limits.
3. Gift Giving
Ask grandparents and other family members to use some of the money they’ve set aside for presents to invest in your child’s future. This could be done through a service like Gift of College or Leaf College Savings, which allow family and friends to gift funds directly into your child’s 529 plan. All those birthdays, Christmases and other occasions will add up over the years.
4. Use Tax Returns and Bonuses
If you get back a tax return every year, why not invest some of that money toward your child’s college education? The same thing goes for bonuses from work. Put those extra funds to good use instead of wasting money on goods you don’t really need.
Upromise is a free rewards program that allows you to earn cash back for shopping and dining. In order to take advantage of this free money, sign up for a free account on their website. When you register your credit cards, grocery store cards, and loyalty cards, every eligible purchase you make earns cash. You can also connect your Upromise account to a 529 savings account and transfer money over.
6. Custodial Accounts
A custodial account is a savings account you open in your child’s name. Other people, like family members and friends, can contribute to these accounts any time. Funds are held until your child reaches a certain age.
The money doesn’t necessarily have to be used for college costs. Custodial accounts do have some tax benefits, but not nearly as many as 529 plans. Keep in mind, custodial accounts count as an asset for your child and could affect how much federal aid they can receive through the FAFSA.
Other Tips for New Parents Saving for their Child’s College Education
New parents should take advantage of one or more of the programs above. Beyond that, there are additional ways to make saving for college easier:
Start early. The earlier you plan, the more time you have to save.
Avoid Parent PLUS Loans at all costs. You would be better off having your child get student loans and contributing toward them instead of using Parent PLUS Loans.
Avoid Prepaid College Tuition Plans and Savings Bonds. These options aren’t very good long-term investments.
Use a Student Loan Calculator. Using a tool like a student loan calculator can help parents understand student loans, how they break down into monthly payments, how different interest rates affect your future loans, and other valuable data that can be used in planning.
Set savings goals. Sit down with your spouse and create a game plan for how much money you want to save for college expenses for your child. Set realistic savings goals and figure out how you are going to reach those goals.
It seems like college is so far away, but there are many parents with kids in college now who wish they took the time to plan for their child’s college education. Make time to have these conversations with your spouse and determine if you should be setting aside money for your child’s future.
About the Author
Travis Hornsby founded Student Loan Planner after helping his physician wife navigate ridiculously complex student loan repayment decisions. To date, he’s consulted on over $400 million in student debt personally, more than anyone else in the country. He is a Chartered Financial Analyst and brings his background as a former bond trader trading billions of dollars.
He brings that same intensity to analyzing the best repayment paths for graduate degree professionals with six figures of student debt. He's helped over 1,700 clients save over $80 million dollars on their student loans, and he’s been featured in U.S. News, Business Insider, Forbes, Huffington Post, Rolling Stone, ChooseFi, Bigger Pockets Money, and more.